Cost Elements play a very important role in the reconciliation/alignment of costs and postings between Financial Accounting (FI) and Management Accounting/ Controlling (CO).

There are two types of cost elements such as Primary Cost Elements, Secondary Cost Elements and Revenue Cost Elements all which have a specific purpose. The category set for a Cost Element at the time of creation will determine the transactions that can utilize the cost element.

Due to the integrated nature of SAP Systems there is a requirement to create expense accounts in Financial Accounting with corresponding primary cost elements in Controlling. Cost elements capture costs incurred within a particular accounting period. This ensures that expenses in Financial Accounting and primary costs in Management Accounting can be reconciled. Cost Elements are closely related to the general ledger accounts used in FI-GL.

The SAP terminology defines two different categories of Analytical Accounts (Cost Elements) as below:

o The Primary Cost Elementso The Secondary Cost Elements

Primary Cost Elements:

The codification and description for “primary cost elements” is same as the General Ledger accounts.

Primary cost elements can be automatically created when we have a new G/L account in the CoA. Or we also have an option to keep the cost element creation manual (refer Chart of Accounts)

All P&L accounts will be created as “primary cost elements” in 3 categories:

o Cost elementso Revenue elemento Sales Deduction

No Primary Cost Element can be created without creating G/L Account in Finance module.

“Primary costs elements” are grouped under a hierarchy for reporting purposes; it enables to have a more operational view than the sequential sorted view of the Financial AccountingThis grouping will be managed with master data: cost element groups. It doesn’t require any customizing

All primary cost elements will be updated by FI posting during:o Invoice entrieso Depreciation calculationo Etc.We will not have any manual posting on “primary cost elements” in CO Module. So, the balance of primary cost elements will be always the same with FI balance.

If any G/L account is not created as a “primary cost element”, postings on this account will not be seen in CO module, neither in Cost Center Accounting, nor in Profit Center Accounting.

If any G/L account is created as a “primary cost element”, it will ask a CO object at the time of the posting in FI module. If we don’t enter a CO object, system will not save this data entry in order to keep FI and CO balance 100% same.CO objects can be the followings:o Cost centero Projecto Process Orderso Internal Orderso Service Orderso Etc.In order to support our overhead reporting requirement, all expense accounts will work with “cost center” information.

Sometimes we might need to post expenses directly to the jobs (service orders or projects/WBS). In that case, 2 CO objects will be used: service order or WBS and cost center. Cost center will have the “statistical posting” just to support overhead reporting.

Secondary Cost Elements

For analytical purpose, the Controlling has additional accounts “secondary cost elements”, which are not defined in the Financial Accounting (FI module). These accounts are used to trace internal flows of allocation within the Controlling.

“Secondary cost elements” do not correspond to any G/L account in Financial Accounting, thus they are only used in Cost Controlling (CO modules).

“Secondary costs elements” can be grouped for reporting purpose. Cost element groups are considered another master data of CO module. Some of the cost element groups will be common for all entities, and each entity will have a flexibility to create their own groups according to their needs.

Standard “Secondary cost element” categories will be used in Core Design. Given below is the list of few categories for your ready reference:Category 21 - Internal settlement: It is used for settlement from one CO object to another CO object.Category 31 – Order/Project Result Analysis: It is used to calculate work in process for production orders, process orders and product cost collectors.Category 41 – Overhead Rates: It is used for indirect allocations from cost center to cost objectsCategory 42 – Assessment: It’s used for internal cost allocations between cost centers or different cost objects.Category 43 - Internal Activity Allocation: Direct allocation from cost centers to Cost object